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SUBJECT: Money Laundering DATE: February 28, 1995

SUBJECT: Money Laundering DATE: February 28, 1995

This memorandum updates work done by the Money Laundering Working Group ("working
group") in 1992. Part I of this memorandum reviews the history of the
Commission's consideration of the money laundering guidelines, including a
synopsis of the 1992 working group report. Part II describes the proposed
amendment to the money laundering guidelines that has been published for
comment. Part III describes case law and other relevant information that has
become available since the 1992 report.

I. History of the Commission's Consideration of the Money Laundering
Guidelines

Some time after the money laundering guidelines were promulgated as part
of the initial set of guidelines in 1987, the Commission began receiving public
comment criticizing how the money laundering guidelines functioned. Comment
received by the Commission asserted that guideline sentences in cases in which
money laundering was charged were often disproportionately high relative to the
seriousness of the offense and, because of inconsistent charging, led to
unwarranted sentencing disparity. In 1992, the Commission convened the Money
Laundering Working Group to assess these concerns.

(a) Synopsis of the 1992 Report

The working group analyzed the relevant statutes, case law, and a sample
of presentence reports from cases sentenced under the money laundering
guidelines during fiscal year 1991. Based on these and other sources of
information, the working group issued a detailed report to the Commission in
October, 1992. The report (attached at Appendix A) tended to confirm certain
observations raised by the public comment.

The report found that the principal money laundering statutes, 18 U.S.C.
1956, 1957, cover a broad range of transactions - - many perhaps not
traditionally thought of as money laundering. The money laundering statutes can
apply to this broad range of transactions as long as the transactions involve
proceeds from any of a similarly broad range of crimes.

Analyzing actual FY 1991 cases, the working group found that money
laundering charges most often involved a relatively routine financial
transaction (e.g., depositing, wiring, transferring, withdrawing money)
that was essentially "incidental" to an underlying crime (e.g., a
fraud, gambling offense, or drug sale) that the defendant charged with money
laundering had also committed. The working group concluded that while the
underlying crime usually appeared to be the real gravamen of the overall offense
conduct, a money laundering count could generate a guideline offense level that
was quite different from that of the underlying offense, and, as a consequence,
greatly influence the sentence.

With respect to what the working group categorized as "white collar"
offenses (i.e., fraud, embezzlement, import/export violations, and copyright
infringement), the working group found that the addition of a money laundering
count raised the defendant's offense level 96% of the time, and frequently to a
significant degree. For example, in one reasonably typical case examined by the
working group, the defendant had committed a fraud and deposited the proceeds of
the fraud in the bank. Consistent with court decisions construing the money
laundering statute, the government charged the deposit of the fraud's proceeds
in the bank as money laundering, in this case for "promoting" the
fraud by allowing the defendant access to the funds for personal use. Pursuant
to the fraud guideline (2F1.1), the offense level for the underlying fraud was
19 (guideline range of 30-37 months for defendants with no criminal
history). Pursuant to the money laundering guideline (2S1.1), the offense level
for the money laundering offense - - here, promoting the fraud by depositing the
fraud's proceeds in the bank for personal use - - was 28 (guideline
range of 78-97 months for defendants with no criminal history). Thus, the
addition of the money laundering count in this case substantially increased the
defendant's sentence.

The working group found that differences between applicable guideline
offense levels for, respectively, underlying and money laundering counts raised
a separate concern in drug cases. In contrast to white collar cases, in which a
money laundering count nearly always increased the applicable offense level, the
working group found that in drug cases the money laundering offense level was
higher than that for the underlying drug trafficking conduct about half the time
and was lower the other half. The working group found that the potential for
obtaining a lower offense level under the money laundering guideline than under
the drug guideline may have led to charge-based sentence manipulation in some
drug cases:

In many cases, money laundering defendants were initially charged with
participating in the underlying criminal conduct but the counts charging the
underlying criminal conduct were apparently dropped in connection with a plea
bargain. The presentence reports . . . give the clear impression that the
defendant was guilty of and would have been convicted of the underlying criminal
conduct if the case had gone to trial . . .. In some drug cases it appears that
counts involving underlying criminal conduct may have been dropped in order to
give the defendant the benefit of a lower guideline range that corresponded to
the money laundering count.

Overall, the working group concluded that the apparent anomalies in the
operation of U.S.S.G. 2S1.1 were primarily attributable to this guideline's
reliance on inflexible base offense levels - - 20 for all cases involving "traditional"
money laundering offenses (i.e., offenses committed to conceal the source of
illegal funds), and 23 for all offenses committed to "promote"
criminal conduct. The working group concluded that the inherent rigidity of
this approach means that offense levels for, respectively, the money laundering
conduct and the crime from which the laundered proceeds derived may bear little
relationship to each other. Thus, drawing from cases considered by the working
group, a gambling offense that produces an offense level of 12 under
2E3.1 will yield an offense level of 23 under 2S1.1 if proceeds from
the gambling offense are used in a financial transaction covered by the money
laundering statute. On the other hand, a drug dealer using sophisticated means
to conceal the source of proceeds from a drug trafficking offense that would
receive an offense level of 34 if sentenced under the drug trafficking
guideline (2D1.1), would receive an offense level of only 25 if
sentenced exclusively under the money laundering guideline (2S1.1) - - nine
offense levels lower than that for the substantive drug offense and
approximately the same as that for the less serious gambler in the previous
example.

To better assure that sentencing under 2S1.1 reflects the seriousness of
the offense, the working group recommended that the Commission consider amending
2S1.1 to link base offense levels for a money laundering offense to the actual
or approximate offense level applicable to the offense from which the laundered
proceeds derived. The working group further recommended that offense levels in
money laundering cases be appropriately increased, through specific offense
characteristics, to account for traditional money laundering conduct (i.e.,
concealment of the source of proceeds, especially sophisticated concealment) and
money laundering conduct aimed at promoting further criminal conduct. The
working group recommended, finally, that the Commission consider merging
guidelines 2S1.1 and 2S1.2 for simplicity.

(b) The Commission's Consideration of a Proposed Amendment

Consistent with the working group's recommendations, the Commission
directed the working group to draft for public comment an amendment to 2S1.1 and
2S1.2 that would be considered during the 1992-93 amendment cycle. Except for
minor technical changes in the intervening two years, the amendment produced by
the working group in 1992 is the same as that published for comment this year.

When considered in 1993, the proposed amendment received the support of
three commissioners, which constituted a majority of commissioners then holding
office. Two commissioners, however, did not support the amendment. One
commissioner opposing the amendment publicly cited a concern that the Attorney
General, who was at that point newly appointed, might not have had adequate time
to assess the proposal. Because the Commission had only five commissioners at
that time, and four votes are required to promulgate an amendment, the proposal
fell one vote short of adoption.

In the 1993-94 amendment cycle, the Commission again published the
proposed money laundering amendment for comment. When the Commission formally
considered the amendment in April, the commissioner who had previously voiced
concern over the Attorney General's opportunity to review the amendment now
indicated support. Nevertheless, the proposal was deferred, along with other
proposed amendments, out of concern that adoption would spawn litigation over
the "holdover" status of Commissioners Wilkins and Nagel.

II. Description of Proposed Amendment

A copy of the proposed amendment is attached as Appendix B. The
amendment would consolidate 2S1.1 and 2S1.2 for ease of application, and
restructure the proposed new guideline to bring about greater conformity between
the offense level for the money laundering offense and the offense level for the
underlying offense from which the proceeds involved in the money laundering
offense derived. As noted, the purpose of this proposed structure is to better
assure that sentences in money laundering cases comport with the seriousness of
the overall offense conduct.

The amendment would bring about greater conformity between offense levels
for money laundering and the underlying offense in the following way. If the
defendant committed the underlying offense, the money laundering base offense
level would generally be set equal to the Chapter Two offense level for the
underlying offense. If the offense level for the underlying offense could not
be determined, or if the defendant had not committed the underlying offense, the
proposed guideline would employ a "fallback" or "proxy" base
offense level based on the value of the laundered funds.

If the underlying offense involved drug trafficking, the fallback base
offense level would be 12, plus the number of offense levels from the
table in 2F1.1 corresponding to the value of the laundered funds. In all other
cases, the base offense level would be 8 plus the offense levels from
the 2F1.1 table corresponding to the amount of laundered funds.

The number eight was chosen as the minimum fallback base offense level in
non-drug cases because this number corresponds to the base offense level of six
provided for in 2F1.1, plus two levels to account for more than minimal
planning. Guideline 2F1.1 was used as a point of reference because subsection
(a)(3) of the proposed money laundering guideline would typically be expected to
apply in cases involving funds from economic crimes which are, in turn,
typically sentenced by reference to 2F1.1. Subsection (a)(2) of the proposed
guideline provides a minimum base offense level of 12 (for cases in which the
defendant knew or believed the funds were from drug trafficking) to be
consistent with the current guideline structure which generally treats
drug-related offenses as at least four levels more serious than typical economic
offenses (e.g., fraud). The base offense levels provided for in
proposed subsections (a)(2) and (a)(3) are increased as the amount of the
laundered funds increases to ensure that the greater the scope of the money
laundering activity, the greater the sentence. (The current money laundering
guidelines only account for the value of funds when that value exceeds
$100,000.)

To further account for offense seriousness, the amendment uses specific
offense characteristics to increase punishment when the defendant knew or
believed that the transactions were designed to conceal the criminal nature of
the proceeds or when the funds were to be used to promote further criminal
activity. The greatest increase is provided under proposed subsection (b)(2)
for cases involving sophisticated efforts at concealment.

III. Relevant Information Since the 1992 Working Group Report

(a) Reported Case Law

The working group's 1992 report reviewed court decisions considering the
breadth of the then relatively new money laundering statutes. In general, these
decisions tended to hold that statutory elements of money laundering offenses
should be construed broadly. For example, United States v. Montoya
established an early precedent that a defendant's deposit of a check
representing the proceeds of a bribe constituted "promoting" criminal
activity within the meaning of the statute, because the defendant "could
not have made use of the funds without depositing the check." In another
early case, United States v. Skinner, the court upheld a money
laundering conviction when a retail drug seller, who bought cocaine on
consignment, purchased money orders to pay back his out-of-state supplier for
drugs he had just sold. The court concluded that the purchased money orders
violated 18 U.S.C. 1956 because "proceeds" from drug sales were used.
The court remanded the case for resentencing, however, finding that a departure
from the money laundering sentencing guideline should have been considered
because, citing the statutory standard for departures, "the Sentencing
Commission failed to adequately consider that the conduct at issue here could
result in convictions under the Money Laundering Act."

In decisions since the working group's report, courts have generally
continued to interpret expansively the statutory elements of money laundering
offenses, relying for precedent on
Montoya and other cases discussed in the 1992 report. At the same time,
it appears that the broad statutory interpretations of 1956 have led some
sentencing courts to conclude, as the appellate court did in Skinner,
that departures from 2S1.1 can be warranted. By characterizing cases before
them as outside of 2S1.1's "heartland", these sentencing courts have
departed downward from the guideline range for conduct that was integral to,
indistinct from, or that served merely to complete or consummate the underlying
offense. Despite this trend among sentencing courts, however, appellate courts
(apart from the early decision in Skinner) appear to have uniformly
rejected such departures.

As noted, sweeping interpretations of the statutory elements of
money laundering offenses have continued, especially with respect to the "promotion"
element of some 1956 offenses. In United States v. Paramo, the
defendant's scheme involved the embezzlement of a series of IRS refund checks.
Once cashed, the proceeds were spent solely on personal items and not in any way
reinvested into the criminal venture. Nevertheless, the court reasoned that
because the checks were worthless unless cashed, the act of cashing them served
to "promote" the carrying on of the antecedent fraud and thus
constituted an offense under the money laundering statute.

...Paramo understood that the embezzled checks would have
been worthless unless cashed at a bank or otherwise exchanged for negotiable
currency. Given this fact, the jury rationally could have found that the
cashing of each check contributed to the growth and prosperity of each
preceding mail fraud by creating value out of an otherwise unremunerative
enterprise. Accordingly, the jury rationally could have concluded that cashing
the checks promoted each antecedent fraud, and was specifically intended by
Paramo to do so.

Similarly, in United States v. Manarite, the court relied on Montoya
to uphold a money laundering conviction. The court held that the participants'
cashing of stolen casino chips promoted the underlying chip-skimming offense,
because the participants could not reap the rewards of the offense unless the
chips were cashed. Again, there was no evidence that, once cashed, the proceeds
were reinvested into the chip-skimming scheme.

In United States v. Cavalier, the defendant falsely reported to
his insurance company that his van had been stolen, thus setting into action a
mail fraud scheme. To complete its resolution of the claim, the insurance
company sent a check to GMAC, the company that financed the defendant's purchase
of the van, to extinguish GMAC's lien on the van. While arguably only a
tangential component of the fraud, the court found that the check's transfer to
GMAC 1) involved proceeds of the fraud, and 2) promoted the carrying on of the
fraud. Accordingly, because the defendant's false insurance claim had caused
the insurance company to transfer the check, the court held that the defendant
had violated the money laundering statute.

In United States v. Morris, the defendants engaged in a check
kiting scheme in which insufficient funds checks were, at various times, drawn
and deposited into accounts at two separate banks to reflect positive balances
and conceal the overdraft status of those accounts. Ultimately, the parties
obtained a loan from a third bank under false pretenses, using a portion of the
loan proceeds to cover all outstanding overdrafts at the first bank and close
out that account.

The sentencing court in Morris calculated the applicable offense
levels under both the fraud and money laundering guidelines and was troubled by
the disparity. Section 2S1.1 called for a significantly higher offense level
for the money laundering conduct than did 2F1.1 for the underlying bank fraud.
The court reasoned that in this case the money laundering conduct was
essentially a component of the underlying bank fraud that, moreover, served to
make the first bank whole. Reasoning that neither Congress nor the Sentencing
Commission could have intended that a money laundering violation that was simply
a component of an underlying fraud would be sentenced more severely than the
underlying fraud, the court departed downward from 2S1.1 to the level called for
by the fraud guideline.

On appeal, the 8th Circuit panel found no ground for departure because
Congress intended to criminalize a "broad array" of transactions
(citing Skinner and Montoya) and have them punished
cumulatively. As the conduct did not fall outside of the heartland intended by
Congress, the court held that the district court erred in not sentencing
pursuant to the money laundering guideline. The case was remanded for
resentencing accordingly.

In United States v. LeBlanc, the appellate court also reversed a
district court's departure from the money laundering guidelines. This decision
involved two gambling cases that were consolidated on appeal. LeBlanc, a
bookmaker who took sporting bets, accepted and negotiated checks from gamblers
that were made payable to fictitious payees in amounts less than $10,000. The
court considered his conduct essentially that of a bookmaker who became involved
in laundering "solely by virtue of the fact that bets were placed with him
by check, and these checks were subsequently . . . negotiated . . . ."
The sentencing court determined that the conduct fell outside of the heartland
of money laundering offenses and departed downward. It applied the guideline
applicable to operating illegal gambling enterprises, finding that this
guideline most appropriately reflected the defendant's conduct. The defendant in
the consolidated appeal, Weinstein, engaged in virtually identical conduct as
LeBlanc, accepting eight cashiers checks for a $200,000 gambling debt that had
been structured to avoid currency reporting requirements. The court remanded
his case for resentencing for the same reasons.

The First Circuit followed LeBlanc in United States v. Pierro
finding that the money laundering conduct there did not fall outside of the
heartland of 2S1.1 and therefore did not provide a ground for departure. Pierro
was involved in a scheme in which computer parts were stolen, sold, and
subsequently disposed of by a purchaser who, in turn, sold them on credit and
pledged the invoices as security for bank loans.

In United States v. Nguyen, the defendant argued on appeal that he
should have been sentenced under the gambling guideline (which carried a range
of 12-18 months) instead of the money laundering guideline (which carried a
range of 46-57 months) asserting that the essence of his offense was the
gambling activity. The defendant pointed out that the Sentencing Commission is
considering a proposed amendment in this area, but the court responded that the
defendant's argument would not be ripe unless and until the Commission were to
act on the proposal. The court affirmed the 46-month sentence, especially in
light of the fact that the defendant stipulated in his plea agreement that 2S1.1
applied.

In sum, case law since the working group's 1992 report generally can be
characterized by three observations. First, the courts have continued to find
that the money laundering statutes cover a broad range of conduct, including
conduct that is essentially a component of, or at least only incidental to, an
underlying offense. Second, some sentencing courts have been troubled by the
fact that 2S1.1 can sentence such "incidental" money laundering
conduct appreciably more harshly than the underlying conduct and have sought to
remedy this perceived problem through departure. Third, courts of appeals that
have reviewed these kinds of departures have uniformly rejected them.

(b) Hotlines

Since the working group's 1992 report, the attorney hotline has received
five calls inquiring about disparities between money laundering and underlying
crime offense levels. Four of these calls sought information on whether a
departure would be warranted in such circumstances. The attorney hotline has
received an additional seven calls during this period inquiring about the status
of the proposed amendment to the money laundering guidelines.

The probation officer/judge hotline has not received calls directly
inquiring about offense level disparities in money laundering cases. However,
this hotline has received a substantial number of calls, especially with regard
to grouping application, involving multiple count cases in which 1) such
disparities appear to have been present, and 2) the money laundering conduct
appears to have been relatively minor. In one recent call (from December
1994), for example, the money laundering conduct involved the defendant's
deposit of proceeds into a bank account in his own name.

(c) Monitoring Data and Case Review

(1) Drug Cases

The 1992 working group found evidence that the potential for drug
trafficking defendants to receive a lower sentence if charged exclusively with
money laundering (i.e., not the drug trafficking offense) fostered charge-based
sentence manipulation. To determine whether this phenomenon was still
occurring, we asked our Policy Analysis staff to identify cases in which 1)
money laundering was the only offense of conviction, and 2) the presentence
report indicated that drug proceeds were involved in the money laundering
offense. Our staff identified 212 cases as meeting these criteria. We analyzed
a 20 percent (n= 42 cases) sample of these 212 cases.

As had been the case in 1992, we found that counts involving drug
trafficking were apparently not pursued in some cases in order to give the
defendant the benefit of a lower guideline sentence that applied by charging the
defendant exclusively with money laundering. In slightly under half the cases
in our sample (45%; n= 19), the defendant had participated in both the
underlying drug offense and in the conduct constituting the money laundering
offense. In seven of the ten cases (70%) in which we were able to compute a
Chapter Two offense level for the underlying drug count, the defendant received
a lower sentence by virtue of pleading guilty to money laundering. The
difference in offense levels between, respectively, the money laundering and
drug counts averaged eight levels in these cases. (The three cases in which
only money laundering was charged and the money laundering offense level
exceeded what would have been the offense level for the underlying drug count
also showed significant offense level disparity. Offense level differences in
these three cases were, respectively, 16, 9 and 6.)

(2) White Collar Cases

The 1992 working group found that adding a money laundering count to a
white collar case raised the applicable offense level 96% of the time,
frequently to a significant degree. To determine whether fiscal year 1994 cases
evidenced a similar pattern, our Policy Analysis staff identified all FY 1994
cases in which both money laundering and fraud were charged. We then sought to
determine whether offense levels as determined, respectively, under 2S1.1 for
the money laundering count(s) and 2F1.1 for the fraud count(s), were different.

Table I illustrates the findings. There were 55 cases in FY 1944 in which
money laundering and fraud were both charged. In only two cases was the fraud
(2F1.1) offense level higher than the money laundering (2S1.1) offense level.
In these two cases, the offense level difference was one level. In one other
case, the offense level for the money laundering and fraud counts was the same.

In the other 52 cases (95% of the total cases), the money laundering count
raised the sentence, often substantially. In 20 percent of the cases (n= 11),
the money laundering count raised the offense level anywhere from one to four
levels. In 35 percent of the cases (n= 19), the money laundering count raised
the offense level from five to eight levels. In 33 percent of the cases (n=
18), the money laundering count raised the offense level from nine to 12 levels.
Finally, in seven percent of the cases (n= 4), the money laundering count
raised the offense level 13 or more levels.

1Final offense level for these cases is determined after Ch. 3 adjustments
have been applied.

2The difference is determined by subtracting the final offense level for
2F1.1 counts from the final offense level for 2S1.1 counts.

SOURCE: U.S. Sentencing Commission, Data File, MONFY94.

(3) Justice Department Proposal

The Justice Department has recommended that the fallback offense level
used in the proposed amendment for drug offenses also be used for offenses
involving precursor chemicals, violence, firearms, explosives, national
security, and international terrorism. To give the Commission an idea of the
impact of this proposal, we sought to determine how often such cases involved
money laundering in fiscal year 1994. We found 13 cases, all involving
guidelines 2K2.1 (eight cases), 2B3.2 (four cases), and 2M5.2 (one case).

(d) Justice Department "Bluesheet"

In August 1993, the Justice Department sent to all federal prosecutors
what is referred to as a "bluesheet," or, in other words, an update to
the U.S. Attorneys' Manual regarding money laundering. This bluesheet (attached
at Appendix C) reiterated existing Justice Department Policy that "[t]he
Money Laundering Section was established in the Criminal Division, in part to
ensure consistency in certain types of prosecutions . . . ." and went on to
identify a "fourth category of [money laundering] cases . . . . which
require[] prior consultation with the Criminal Division." This fourth
category of cases requiring prior consultation with the Department consists of
offenses in which the violating financial transaction is a deposit, made by the
defendant, into an account bearing the name of the person(s) that committed the
offense from which the proceeds derived - - what might be called a "deposit
only" case. The bluesheet includes an explanation for the new requirement
focusing on the Commission's ongoing consideration of an amendment "to
weaken the money laundering sentencing guidelines."

We cannot fully assess the impact of the Department's consultation requirement
on money laundering sentencing because we lack information at this point on
how frequently consultation occurs and on what advice is given when consultation
does occur. We note, however, that at least one "deposit only" case
was reported to the Commission's probation officer/judge hotline in December
and closely analogous cases have been reported in case law. We also note that
"deposit only" cases are a subset of a substantially larger category
of cases about which public comment and prior staff analyses have raised sentencing-related
concerns. The Department's consultation requirement does not address this broader
category of cases.